The Employee Retention Credit: Scams And Successes

Tom Cullinan, a former IRS official now with Chamberlain Hrdlicka, discusses the basics of the employee retention credit, the recent rise in misleading promotions and fraudulent ERC claims, and the IRS’s response.

This transcript has been edited for length and clarity.

David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: taking credit.

The employee retention credit, part of the pandemic-era relief, has done something few tax credits do. It’s gone mainstream. People around the U.S. are hearing about the credit and what it could potentially do for their business with often misleading, verging on fraudulent, pitches made in TV commercials and phone calls.

So what is this credit and why is it such a big deal now, three years later? Tax Notes legal reporter Caitlin Mullaney will talk about that in just a minute.

Later in the episode, we’ll hear from Tax Notes State author Naomita Yadav about U.S. and U.K. inheritance and transfer tax law.

But first, Caitlin, welcome back to the podcast.

Caitlin Mullaney: Hi, Dave. Thank you so much for having me. I always enjoy being on the podcast.

David Stewart: Now I understand you talked to someone about the ERC. Could you tell us about your guest?

Caitlin Mullaney: Yes. I was recently able to speak with Tom Cullinan. He’s a shareholder at Chamberlain Hrdlicka in Atlanta. Tom was previously with the IRS, where he served as part of Commissioner Charles Rettig’s leadership team as his counselor and acting IRS chief of staff, and he has over 25 years of experience representing taxpayers in IRS interactions.

David Stewart: So what sort of issues did you talk about?

Caitlin Mullaney: Well, we discussed everything ERC. While it’s a credit that only applies to employers, as you mentioned, it’s had a surprising entrance into our daily lives, whether it’s those spam calls we’ve all been getting telling us that our nonexistent businesses are eligible for $26,000 refunds or seeing Ty Burrell, the actor behind the beloved TV character Phil Dunphy, in a marketing campaign for a refund company that focuses on ERC claims.

David Stewart: All right, let’s go to that interview.

Caitlin Mullaney: Well, Tom, first of all, welcome to the podcast.

Tom Cullinan: Thank you. I’m really excited to be here.

Caitlin Mullaney: Well, we’re happy to have you here. Now, before we deep dive into everything ERC-related, do you want to give the listeners just a general explanation of what the ERC is?

Tom Cullinan: At a high level, I think of it as a lifeline to a lot of small businesses that were hurt by COVID. There’s a lot of technicality to it. First, most people just call it the ERC, but it’s a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. It’s available to eligible employers that paid qualified wages to some or all employees during 2020 or 2021. So it’s over now, but qualifying businesses still have some time to file refund claims for prior periods. So that’s why we’re still seeing a lot of activity. And it can be a lot of money, up to $26,000 per employee.

The requirements are different depending on the time period for which someone’s claiming the credit. So you really need to focus in on the rules, but generally there are three ways to be eligible. You can experience a full or partial suspension of operations resulting from a government order issued due to the pandemic during 20[20] or the first three quarters of 2021. You can experience decline, a specified decline in gross receipts during those same periods, or you can qualify as a recovery start-up business for the third or fourth quarters of 2021.

Caitlin Mullaney: Great. Thank you so much for giving us that explanation. Now let’s jump in. Tom, you were actually at the IRS when the ERC was implemented. What are your thoughts on where the credit and more specifically claims for the credit stand three years later?

Tom Cullinan: Well, the interesting thing is now I’ve seen it on both sides. So yes, I was at the IRS at the time, but now I’m representing clients that have claimed the ERC, and I’ve seen what it can mean to their businesses. It really is an important program. But starting with the IRS, I’m just extremely proud of what IRS employees accomplished.

And when I say that, my words were intentional because the IRS is an organization of employees. These people may be our neighbors; they shop in the same grocery stores; they go to our churches; and when COVID came, they, like the rest of the United States, had a wide range of reaction. Some of them were really scared, but they delivered.

And when we talk about the ERC, I think we need to all keep in mind that it was really just one piece of what the IRS was asked to do, which included the IRS delivered three rounds of the economic impact payments, also known as EIP. And I went back yesterday and did some math, and according to my computations, it totals out to 475 million payments totaling more than $800 billion. They were doing a tremendous amount of outreach trying to get the money to everybody who was entitled to it. And in some cases, that was easy enough to make a direct deposit into somebody’s account. But the IRS was also looking to get money to homeless people without bank accounts. There was just a huge amount of outreach and stakeholder involvement in that.

Then you also had — the IRS was obviously tasked with processing the filing season. It was collecting taxes, which are $3.5 to $4 trillion. It was implementing and delivering the advance child tax credit, trying to answer an overwhelming number of phone calls. At one point, the IRS was getting 1,500 calls per second. And then there was the ERC, which obviously also is a tremendously important part of that.

Recently the IRS reported that it received 2.5 million ERC claims. I don’t have any recent data that I could find on the total value of the refunds, but it’s certainly in the tens of billions of dollars. And as I said, I’ve seen firsthand how critical that program was to small businesses. I’ve had clients and just colleagues and people I know tell me how much of a savior it was to their businesses. So it really mattered, and I think the people that were involved should be very proud of the work that they did.

Caitlin Mullaney: Wow, those are some big numbers. Thank you very much for that insider insight. And with implementing the ERC, what would you say was the biggest challenge for the IRS?

Tom Cullinan: So at first, of course, the IRS was trying to administer all this while dealing with COVID, the effects of COVID on its own operation and its employees. So again, we just need to keep that in mind. But then as things progressed, I think, and this is pretty well known, that one of the biggest challenges were the [Forms] 941-Xs, which is the form that you’re going to file for the claim is on paper.

And so that means the IRS needed people to work each one of the claims, which is very resource-intensive. And as I said a moment ago, just a few weeks ago, the IRS had reported that it had received 2.5 million claims. So you can just imagine the manpower that was necessary to pull all that off.

And then there’s a real tension between diligence and speed. On the one hand, the IRS was trying to get these refunds out as quickly as it could. It well understood that businesses were depending on it, and it took that very seriously.

On the other hand, the IRS knows that there’s a lot of fraud in this space, and I’m sure it’s doing what it can to screen those claims out at the front end, but obviously the more focus you put on the claims at the front end, that can slow down the process a bit. So it’s a hard balance to strike.

Caitlin Mullaney: You mentioned a lot of things that I’d like to address throughout the podcast. One of the things you previously mentioned was that you’re currently representing employers with their claims. Are there employers that are actively still finding out about the credit, finding out about their eligibility for the credit? Or are these just ongoing claims that they’ve been working on for the past three years?

Tom Cullinan: Some are claims that have been filed, so they’re obviously anxious about getting their refunds, but there are still folks out there who, for whatever reason, didn’t think they were eligible or may have been told that they weren’t eligible and now they’re having second guesses about that. So we do still see some people coming in that have real eligibility issues.

Caitlin Mullaney: Interesting. And with that, do you think that further guidance regarding the ERC is needed from the IRS?

Tom Cullinan: The IRS has put out a lot of guidance already on IRS.gov. There have been several notices. There are FAQs. The hardest questions, in my mind, are case-specific. For example, whether there was a full or partial suspension of operations resulting from a government order due to the pandemic. That’s very fact-specific. The IRS has given examples, but it’s going to be up to the advisers to apply those examples to a particular business situation to make an assessment of whether the business is eligible or not. And that’s what we do. But I think it would be hard for the IRS to really be more specific about how exactly to apply that.

And then of course, you’ve got the fact that the clock is ticking. Many businesses have already filed. So guidance is going to have less and less effect as time goes on. And when I say that the clock is ticking, there are time limits. As I said, we’re still seeing activity because people can go back and amend for prior periods, but the deadline for any period in 2020 is April 15, 2024, and the deadline for filing for a claim for any period in 2021 is April 15 of 2025. So you’ve got these end dates. And so with that, I think the value of IRS guidance, as every day passes, is diminished little by little. So I wouldn’t expect them to do anything earth-shattering at this point.

And of course, there’s been a lot of recent litigation about how the Administrative Procedure Act applies to the IRS, so if they were going to do anything earth-shattering, so to speak, that might be something that would need to be done by regulation, and that can take just an awfully long time, unfortunately. So again, given the fact that we’ve got these deadlines coming up, my personal view is that I don’t expect to see anything significant.

Caitlin Mullaney: Do you think there’s a scenario where we see an extension of those deadlines?

Tom Cullinan: Actually, I don’t. In fact, recently there have been some suggestions that the deadlines could get pulled back. Commissioner [Daniel] Werfel was quoted a couple of weeks ago — he was in Atlanta [at] the National Tax Forum that the IRS puts on, and he was quoted as saying that he’s made some outreach to Congress about perhaps shortening the date.

And I read some members on [the House Ways and Means Committee] seem to be receptive to at least having that conversation. So I think that there’s at least something going. Of course, it’s up to Congress to act, but that there’s at least some push to accelerate rather than extend.

Caitlin Mullaney: Interesting. And as you mentioned, I would imagine that contributes a lot to the urgency of a potentially fluctuating deadline.

We’re going to go in a little bit of a different direction now. One area we have seen a lot of IRS releases has been warnings against misleading claims and scams from aggressive promoters about the ERC at so-called ERC mills. Let’s talk about those. What exactly is an ERC mill?

Tom Cullinan: I don’t think there’s a standard definition, or at least there’s not one that I’ve ever seen, but in my mind, it’s cold-calling with promises without even knowing your situation. It’s one of those “I know it when I see it.” I’ve gotten cold calls. I got cold calls when I was the IRS acting chief of staff telling me that my LLC qualified for the ERC.

First, I don’t own an LLC. I was at the IRS at the time. I was just amazed that somebody is leaving me these messages. And within a few weeks after that, my wife was sharing with me emails and texts that she was getting telling her that she qualified, not that you may qualify or that there’s a question or we’ve seen something to suggest that you might qualify. It was [a] flat-out statement: “You qualify for the ERC; you’re missing out on $26,000 per employee.” And then my youngest daughter started getting them. I almost felt like playing a couple of them for the podcast, but I guess my better judgment got ahold of me.

And then I’ve seen too on LinkedIn really, a lot of people are sharing, in the practitioner community, some of the more aggressive pitches, and you see that some of these outfits are putting together letters that actually look like they come from the IRS. They’re sending them to, again, businesses, and that’s a hard thing for a business to react to. You get this letter; it looks like it comes [from] the IRS; it’s telling you that you’re eligible for this. All you need to do is pick up the phone, call the 1-800 number, and they’ll walk you through the process. I would absolutely consider that a mill.

Caitlin Mullaney: I’ve actually gotten a few of those calls myself offering $26,000 in refunds for my nonexistent business. Can you give an insight on the IRS response to the issues resulting from these ERC mills?

Tom Cullinan: There’s certainly been no shortage of warnings. I think the IRS has done a good job of warning businesses to be wary. One thing that I think that may come out of this is authority for IRS to regulate return preparers.

That’s something that [the] IRS has been asking Congress for authority to do for years, and maybe this is something that finally prompts Congress to act because we’re seeing congressmen and senators pretty consistently express some concerns about what’s going on in this space.

They listen to the radio just like we do. They’re getting phone calls from mills just like other people are. I think they understand that there are real issues here, but without the authority to regulate return preparers on the front end, I think the IRS has really been focused to, well first screen the — as best they can — screen the claims that are coming in the door. But again, you get back to that tension that they understand that businesses need the funds so that they’re trying to just ride that balance.

But as to shutting down the mills, what the IRS is doing is more of a kind of back-end approach again, because they can’t really regulate it at the front end, and they’re doing that through criminal investigations or promoter audits or both, and they’ve been pretty transparent about that.

There’s been a lot of public messaging, and they’re doing that obviously to try to influence behavior and let folks know that they’re very involved in this space and there can be quite serious consequences for people that are doing bad things.

Caitlin Mullaney: Do you think we’re going to see a lot of tax crime cases coming out of these mills and the improperly claimed credits as a result?

Tom Cullinan: I do. I think it’s notable that one promoter already pled guilty to aiding in the filing of false returns in Utah in June of last summer, so June of 2022. Criminal cases usually take a long time to develop, so that was really fast, which signals to me that IRS-CI, CI is Criminal Investigations, is very involved and has been for a while.

The IRS doesn’t generally share [the] number of investigations, so I wasn’t able to find any information directly from IRS, but they also respond to letters from congresspeople, and a couple of congresspeople have shared information. So I’ve seen reports again from congresspeople who are apparently sharing what they got from the IRS that as of just this past April, the IRS had 122 open criminal investigations involving more than $1.2 billion of potentially fraudulent ERC claims.

So that’s a lot of work. That’s a lot of activity, which would, yes, lead me to believe that we’re going to see more criminal cases and the IRS knows there’s a lot of fraud here. You can see that in all the repeated press releases with warnings to taxpayers, and I think we’re going to also see more audit activity. And one thing that I don’t know that it’s gotten as much publicity, but when Congress enacted the law, it also gave the IRS more time to audit.

In a typical case, the IRS gets three years, but with the ERC, Congress gave the IRS five years, so I think we might see more civil activity over that span as well. But of course, the IRS can’t audit everyone. And one thing that the IRS playbook is to rely on [is] criminal investigations as a deterrent and to publicize it so when somebody gets indicted, it’s a powerful warning to other similar actors. But again, building a criminal case takes a long time, and the deterrent aspect is waning as the clock for claiming ERC ticks down.

Caitlin Mullaney: And you mentioned audit activity, an increase in that. Do you think we’ll see anything happening with the penalties that would be applied to taxpayers who were in the situation because they were scammed or misled?

Tom Cullinan: That’s a hard situation. There’s just so much misinformation out there. And going back to the taxpayers who I was talking about a couple minutes ago, imagine you get a letter that looks like it’s coming from the IRS, and it’s saying, “Call this 1-800 number, and we’ll help you qualify,” and you call that number, and the folks on the other end could even pretend like they’re at the IRS, and that taxpayer goes ahead and files for the claim.

It is just really hard for me to think that that’s an appropriate place for a penalty. So I would anticipate that the IRS is just going to have to be flexible here.

As I said, I’ve gotten calls, my wife has gotten calls, my kids have gotten calls, and you said you’ve gotten calls, and some people can easily sift through all that, but for other people, it’s harder. I just think there’s going to have to be some relief, but then the hard thing really becomes you also have people that are trying to take advantage and parsing through those is going to be a case-by-case situation.

But I would again be hopeful that anybody who was scammed or misled which I guess is really your question if you were scammed or misled, I would hope that at the end of the day, the IRS would be very lenient.

Caitlin Mullaney: And with all these scams out there, what advice would you give to employers who are trying to claim the ERC?

Tom Cullinan: Well, I’d be wary of cold calls. Certainly you should be calling the advisers rather than the other way around. I did have one thought on this because I had read something maybe a week or two ago where folks were saying to be really wary of contingency fees, that’s a huge red flag.

I’ve got a slightly different view on that. I mean, I understand what those people are saying, but I think it’s also important to keep in mind that the whole point of the ERC was to really help cash-starved businesses survive.

And I wouldn’t want eligible businesses to miss out simply because of a cost to participate, and a full analysis of eligibility can be expensive. If you’re operating in a lot of jurisdictions, you’ve got a lot of different business lines [and] that could be costly.

So I can see a role that somebody doing this on a contingency basis can actually add some value. Again, that’s consistent with, in my view, the point of the ERC in the first place. But of course, those are policy calls.

Caitlin Mullaney: Do you think that this ERC program is one that we could potentially see replicated in the future?

Tom Cullinan: Well, since it was a response to a global pandemic, I certainly hope not. But with that said, if there were to be something disastrous in the future, there is certainly history for Congress just taking what’s already been done and cleaning it up and putting it back out there. Because I’m sure COVID also affected Congress and Congress’s staff, and if there was something like that to happen in the future again, I’m sure they would start with what’s already been done.

But yeah, there’s a lot to learn from the program. I’m sure there could be improvements, so I wouldn’t anticipate anything that looks exactly the same, but I think it would probably be a starting point.

Caitlin Mullaney: Finally, bringing it full circle where it stands. Do you think the credit has fulfilled its intended purpose?

Tom Cullinan: I do. That certainly, in combination with the EIP and the PPP and other programs, was really to keep the American economy from crashing, and it didn’t. There was obviously a massive cost, but yeah, I’m not in a position to pass judgment on that.

Caitlin Mullaney: And now Tom, I’ll just ask if you have any closing thoughts for us today.

Tom Cullinan: Just that I really appreciate being here. I think it’s a very important topic; it was important to a lot of businesses. Again, having been on the inside of the IRS and now on the outside representing taxpayers, it actually reinforces my view that what the IRS was doing here was really important.

They should be proud. I see these taxpayers, how much it means to them; literally in some cases, they really need the money just to keep the business alive. So it’s a critical program, and it’s one that I was glad to even have just a small part of any piece of this.

Caitlin Mullaney: Well, we appreciated having you here to talk all things ERC with us. Sadly, that’s all the time we do have for today. I want to again thank Tom for coming on the podcast. It was great having you with us today.

Tom Cullinan: Thank you for having me. I really do appreciate it.